Tuesday, September 13, 2011

Detroit Sets Future on Two-Tier Wages; That Could Be Part of the American Manufacturing Renaissance

DETROIT (NY TIMES) — "They are a cornerstone of Chrysler’s unlikely comeback: 900 employees turning out a Jeep Grand Cherokee sport utility vehicle every 48 seconds of the working day at an assembly plant here.  Nothing distinguishes them from other workers at the Jefferson North plant, except their paychecks. The newest workers earn about $14 an hour; longtime employees earn double that. 

With the economy slumping and job creation once again a pressing issue in the White House and Congress, the advent of a two-tier wage system in Detroit is spiking employment for one of the country’s most important manufacturing industries. The new jobs, which are seen as long term, are being watched closely by economists, executives in other industries and Washington policy makers eager to increase employment in manufacturing and other areas.

What was once seen as a desperate move to prop up the struggling auto industry is now considered an integral part of its future. The demand for $14-an-hour manufacturing jobs is providing Detroit’s Big Three automakers with a ready pool of eager new employees. Last year, Chrysler was flooded with inquiries about the jobs here. It froze the list after receiving 10,000 applications."

MP: The two-tier wages are definitely one factor in the revival of U.S. automotive jobs, and this is reflected in the large gains in manufacturing employment in states like Michigan (see chart above).  Over the last two years, manufacturing jobs in Michigan have increased by 52,000 to more 500,000.  That's the largest two-year job gain since the the mid-1990s, and reverses a downward trend in Michigan manufacturing employment that started in 2000 when there were more than 900,000 manufacturing jobs in the state.   

With the two-tier wage structure, it's likely that the Big Three will continue to expand domestic vehicle production, now that the wage costs are competitive with non-union foreign transplants like Toyota and Honda, and even increasingly competitive versus production in Mexico and other overseas locations.  Increased automotive manufacturing in the U.S. will likely be one part of the general renaissance of American manufacturing predicted by the Boston Consulting Group, as the wage gap with low-wage countries like China starts to shrink, and eventually disappears, adjusted for productivity, transportation and quality.  The two-tier wage scale for autoworkers provides one example of why the wage gap with China, Mexico and other offshore locations is shrinking. 

One point: If Chrysler is receiving 10,000 applications for jobs at the lower-tier $14 per hour wage, that's one indication that $14 per hour is still too high.  That is, Chrysler could offer to pay less than $14, and still have an excess supply of workers. 

37 Comments:

At 9/13/2011 5:46 PM, Blogger Marko said...

It is time to deal all of America an ace - Right to work for the whole country!

 
At 9/13/2011 6:48 PM, Blogger JohnL said...

Wage compression is not a positive growth story!

 
At 9/13/2011 6:54 PM, Blogger Benjamin said...

There was a time, when our primary "competitor" was the Soviet Union (1950-60s, early 1970s), that our leaders bragged about how much American workers made. They have "swimming pools" said Ronald Reagan. Our system trumped the Soviets, as evidenced by living standards for working people.

Now all we hear is that wages have to come down due to "fierce global competition."

The same global trade that is allegedly raising our living standards.

I realize the story is complicated, but there are times when results seem very simple.

 
At 9/13/2011 7:11 PM, Blogger Cabodog said...

The unions finally figured out they killed the golden goose. Sucked things dry.

 
At 9/13/2011 7:41 PM, Blogger Benjamin said...

Cabodog:

Maybe so, but America was far more unionized in the 1950-70s, and living standards soared.

 
At 9/13/2011 7:42 PM, Blogger aorod said...

How about a black market auto factory? Hidden in the hills. Who is John Galt?

 
At 9/13/2011 8:47 PM, Blogger VangelV said...

The same global trade that is allegedly raising our living standards.

I realize the story is complicated, but there are times when results seem very simple.


Of course it is simple. If you have skills and are very productive you can get a lot of money and live very well. But when you are overpaid you do not have a nice future.

The American standard of living has been saved by cheap imports from abroad. If ordinary workers had to buy domestically produced goods they could not afford to buy nearly as much as they do now.

 
At 9/13/2011 8:53 PM, Blogger RollCast said...

$14/hour, working 1920 hours a year, totals less than $27K before income and payroll taxes, and about $1000 below the federal poverty level for a family of four. I'm assuming that this is for an assembly line job, i.e. unskilled labor. Given that the old tier rate for wages, overtime, bonuses, and paid time off came to $40/hr, then one can estimate that the new tier compensation is probably around $20/hr, or a total compensation of over $38K a year. Not bad for unskilled labor. Add on top of that benefits such as health insurance and pensions/401K of $10/hr (a guess). This is still a good unskilled labor package.

 
At 9/13/2011 10:22 PM, Blogger Sean said...

VangeIV,

The American standard of living has been saved by cheap imports from abroad.

Saved from what? What would drive it down since we have had consistent positive productivity growth?

 
At 9/14/2011 5:55 AM, Blogger Larry G said...

" $14/hour, working 1920 hours a year, totals less than $27K before income and payroll taxes...for a family of four"

recognize that they'll pay more in FICA than statutory income taxes and that in reality with 2 kids, they'll likely get most if not all of the withheld income taxes back and become part of the 45% who do not pay any Federal Income tax.

recognize also that they'll likely not be able to afford a house and will pay rent - and that educating their 2 kids will require 20K a year in taxes - that they will not come close to paying for.

 
At 9/14/2011 6:13 AM, Blogger sethstorm said...

10000 applicants at $14/hr doesnt mean that there is too high of a wage. It means that the region has been made desperate enough to make a bad deal look attractive.

Invoking the canard of competitiveness doesnt make a deal better. The proper course of action would be to block the damaging effects of Third World desperation. Competitiveness is simply a measure of desperation when used in economics.

The US has made a grave mistake by letting the Second and Third Worlds in. It is a worse mistake to let them drive how products are made, with the US simply as a function of the upper tier Third World product - versus a true First World product from the ground up.

Marko:
No, you mean nullifying it over the whole country. Give the US workers the ace, not the company. RTW has not demonstrated any proof except as a way to eviscerate unions - despite any contrary intents.

 
At 9/14/2011 6:27 AM, Blogger sethstorm said...


The American standard of living has been saved by cheap imports from abroad. If ordinary workers had to buy domestically produced goods they could not afford to buy nearly as much as they do now.

Not when the products are made for Third World markets as opposed to a product that was First World only from the beginning.

 
At 9/14/2011 6:31 AM, Blogger VangelV said...


Saved from what? What would drive it down since we have had consistent positive productivity growth?


Saved from the burdens placed on workers by the massive growth of government. The American worker must support a massive parasite class that was much smaller before. Total taxes are significantly higher than before. That means a lot less for consumption. Had the average worker not had the choice of cheap imports he would not have been able to consume as much.

 
At 9/14/2011 6:33 AM, Blogger VangelV said...

recognize also that they'll likely not be able to afford a house and will pay rent - and that educating their 2 kids will require 20K a year in taxes - that they will not come close to paying for.

Nonsense. Education is only that expensive because it is wasteful. You could educate children for far less money than it spent today and have those kids actually learn how to do math and read and write properly.

 
At 9/14/2011 6:34 AM, Blogger VangelV said...

10000 applicants at $14/hr doesnt mean that there is too high of a wage. It means that the region has been made desperate enough to make a bad deal look attractive.

Which means that the wage is too high. The workers are desperate enough to accept a lower wage but the car company offered $14/hr.

 
At 9/14/2011 6:40 AM, Blogger sethstorm said...


Which means that the wage is too high. The workers are desperate enough to accept a lower wage but the car company offered $14/hr.


No, they are only desperate enough to do so due to the lack of acceptable choices.

 
At 9/14/2011 6:44 AM, Blogger VangelV said...

Not when the products are made for Third World markets as opposed to a product that was First World only from the beginning.

Nonsense. Purchasing a $3 knife made by a German company in China that is the same quality as as the $10 knife I used to buy from Germany or $12 from Japan leaves me with money to spend on other items.

 
At 9/14/2011 6:46 AM, Blogger Larry G said...

" Nonsense. Education is only that expensive because it is wasteful. You could educate children for far less money than it spent today and have those kids actually learn how to do math and read and write properly. "

until it changes though - it's the reality.

when a child cost 10K a year to educate - the money to do that has to come from somewhere... if it does not come from the parent.

this is the reason why property taxes are so high in many places...

there are few, if any, places in the US where it does not cost at least 8K a year to educate and in some areas it's 12K or more.

wherever you have working poor - those costs have to be picked up by those who are not poor.

and the well-off like GOOD SCHOOLS - they won't move away to where schools are cheaper...and worse...

 
At 9/14/2011 6:51 AM, Blogger VangelV said...

No, they are only desperate enough to do so due to the lack of acceptable choices.

It seems to me that when you get 10,000 applications for a $14/hr job it is clear that the wage rate is above market. Keep in mind that those people have choices among many jobs being offered in the economy. They chose the highest paid option. That is not desperation. Desperation is when they don't have choices and have to accept minimum wage.

 
At 9/14/2011 6:52 AM, Blogger geoih said...

Quote from Benjamin: "They have "swimming pools" said Ronald Reagan. Our system trumped the Soviets, as evidenced by living standards for working people."

It's amazing how much you can achieve by inflating the world's reserve currancy on the backs of everybody else.

It's really not that complicated at all.

 
At 9/14/2011 6:55 AM, Blogger VangelV said...


when a child cost 10K a year to educate - the money to do that has to come from somewhere... if it does not come from the parent.


It is because the money does not come from the parent that it costs $10K AND that you get children who can't read and write.

this is the reason why property taxes are so high in many places...

Absolutely. You have high paying parasites who have been granted a monopoly on education and do not have to compete or to do a good job. Let competition into the system by ending the monopoly and the cost and quality will improve.

 
At 9/14/2011 6:56 AM, Blogger geoih said...

Quote from Larry G.: "recognize also that they'll likely not be able to afford a house and will pay rent - and that educating their 2 kids will require 20K a year in taxes - that they will not come close to paying for."

Perhaps you should plan on giving them some of your money (I know that's what the statists are planning).

 
At 9/14/2011 7:04 AM, Blogger geoih said...

Quote from sethstorm: "Invoking the canard of competitiveness doesnt make a deal better."

No, but it does recognize reality. Building walls to restrict competition simply changes who benefits, in this case the people with the political connections (i.e., the guns).

Invoking the canard of collectivism (e.g., nationalism, ethnicism, etc.) doesn't make it any less bigoted.

 
At 9/14/2011 8:01 AM, Blogger sykes.1 said...

In time, the two-tier system becomes a one-tier system. Industrial wages are cut in half.

What if this spread to other areas? K through PhD teachers are clearly over paid and under worked. Hence the large number of law and economics professors with blogs. Suppose a full professor at UM-Flint made $30,000 per 9-month year, total compensation. What then?

By the way, if industrial wages go done across the board, everyone's wages will go down.

 
At 9/14/2011 8:41 AM, Blogger Sean said...

VangeIV,

It seems to me that when you get 10,000 applications for a $14/hr job it is clear that the wage rate is above market
There are some baked-in assumptions there:
1. A high proportion of the applicants are qualified. Unemployed people are likely to apply for jobs they are not qualified for because it's a reasonable gamble
2. The labor supply / wage curve is not steep. Maybe it's better to offer $14/hr and cherry pick good workers than to offer $13/hr and get 5K applicants. After all, 10K applicants for a few hundred jobs is a lot per job, but 10K applicants is tiny compared to the size of the labor pool.
3. Applicants know what they're doing. Applicants may figure that they may quickly move beyond the starting wage.
4. Applicants may not intend to stay if they get a job. Everyone knows it's easier to get a job if you have a job, so the unemployed may eagerly seek temporary underemployment. The employer is not always grateful for that kind of interest.

In short, lowering wages in response to the size of applicant pool is not always as rewarding as it may sound.

 
At 9/14/2011 8:53 AM, Blogger Larry G said...

" In short, lowering wages in response to the size of applicant pool is not always as rewarding as it may sound. "

more than likely, the manufacturer is offering what it can offer and still produce a competitive price on it's products...

the size of the applicant pool says more about the numbers of unemployed and underemployed than anything about the company offering the jobs.

 
At 9/14/2011 11:43 AM, Blogger sethstorm said...


Everyone knows it's easier to get a job if you have a job

Easily solved by removing employment status discrimination from the table. If an employer can't play hardball with a worker, they're more likely to treat them better. If an employer sees the opportunity to play hardball, they will take it.


Applicants may not intend to stay if they get a job.

Only in a good economy.

 
At 9/14/2011 11:43 AM, Blogger Kevin12345 said...

These two tier wage structure may prove as something revolutionary in the manufacturing industry...Already this industry is facing a big competition from Chinese industries , so now with this thing in picture something new can happen..
To avoid the risks, I follow http://www.forecastfortomorrow.com/ they give an accurate predictions about the market and other happenings

 
At 9/14/2011 9:08 PM, Blogger Sean said...

Everyone knows it's easier to get a job if you have a job
Easily solved by removing employment status discrimination from the table.

The law is a really big hammer for that kind of thing. I can't possibly justify legally disallowing employment status as a hiring consideration. Aside from being completely unenforceable, it seems pretty immoral.

 
At 9/14/2011 9:10 PM, Blogger Sean said...

the size of the applicant pool says more about the numbers of unemployed and underemployed than anything about the company offering the jobs.
The number of unemployed is the supply side of labor supply and demand: it should affect wages to some extent. It's just not the only consideration.

 
At 9/15/2011 12:50 PM, Blogger sethstorm said...


The law is a really big hammer for that kind of thing. I can't possibly justify legally disallowing employment status as a hiring consideration. Aside from being completely unenforceable, it seems pretty immoral.

Given the amount of things employers will do to forsake the long-term unemployed, an iron-clad block on employment status is the only good way.

 
At 9/16/2011 8:50 AM, Blogger VangelV said...

"It seems to me that when you get 10,000 applications for a $14/hr job it is clear that the wage rate is above market


There are some baked-in assumptions there:
1. A high proportion of the applicants are qualified. Unemployed people are likely to apply for jobs they are not qualified for because it's a reasonable gamble...


Yes, many unqualified people will apply. But the applications did not stop at 10,000. The company cut them off at 10,000 because there were plenty of qualified people for the number of jobs being offered.

Under any rational and reasonable analysis we have to conclude that the wage paid was above market. Had that not been the case the company would not have had to stop taking applications.

 
At 9/16/2011 10:02 PM, Blogger ws4whgfb said...

The notion that rich people subsidize the education for poor people is overblown.

Renters people don't totally mooch off property owners with regard to education. Rents are priced to compensate for the taxes the landlord pays. If it costs $10,000 to educate a student k-12 or 13 years that's $769 per student per year.

What is unfair is that a poor person who has no children is subsidizing the children of their wealthy neighbors.

Also consider that school systems are often segregated by economic status. How often do you have a minority of wealthy houses in the same town as a bunch of tenements?

 
At 9/17/2011 4:46 AM, Blogger Larry G said...

that's 10K PER YEAR.

it varies from 8-12K per year and usually about 1K comes from the Feds and then depending on the State - 4-5K from the state and 4-5K from the local.

Most people with kids do not pay anywhere near the 10K in total taxes except for the rich so the difference is made up by folks who don't have kids especially single people.

 
At 9/17/2011 10:17 AM, Blogger Unknown said...

I think the two-Tier is great. This could help the unemployment rate here in michigan. Anything lower than 14 would decrease the ability to live and might attract lower skilled workers.

 
At 9/17/2011 6:40 PM, Blogger VangelV said...

it varies from 8-12K per year and usually about 1K comes from the Feds and then depending on the State - 4-5K from the state and 4-5K from the local.

The federal government and the states have no money that they earn so they cannot pay anyone for anything out of pocket. To spend money they have to take it from taxpayers, or from savers in the form of inflation.

 
At 9/17/2011 6:42 PM, Blogger VangelV said...

I think the two-Tier is great. This could help the unemployment rate here in michigan. Anything lower than 14 would decrease the ability to live and might attract lower skilled workers.

Let me see. You can buy a house in Detroit for less than the price of a new car. It seems to me that $14 per hour might be sufficient, particularly if the idiots in City Hall permit low cost retailers to establish a presence in the city.

 

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